Latest Stories

Latest Stories

IRS Issues Second IDD on Domestic Production Deduction

By Beth Benko, CPA, Washington, DC

Related

TOPICS

Uncategorized Article

Tax Section

Editor: David J. Kautter, CPA Ernst &
Young LLP

The IRS has issued a follow-up directive to
the industry director directive (IDD) issued on December 6, 2006
(LMSB-04-1206-018), on the Sec. 199 domestic production
deduction (DPD) (LMSB-04-0707-049). The DPD is a designated Tier
I issue and as such must be identified, developed, and resolved
in a consistent manner across all IRS Large and Mid-Size
Business cases involving similarly situated taxpayers. The IRS
believes that the DPD collectively represents significant tax
dollars, and early indications suggest that taxpayers have
inconsistently applied the rules promulgated under Sec. 199. The
intent of the follow-up IDD is to describe controls being placed
on the review of larger deduction amounts.

The previous
IDD set forth five minimum checks required in every case, which
can help an IRS exam team determine whether to include the issue
in the audit plan. Not all cases will lead to mandatory audit of
the DPD. In the IDD, the Service states that cases meeting
certain established criteria will be subject to mandatory audit.
Those criteria, however, have been redacted from the document.

When the DPD is audited, the IRS continues to concentrate
on determining the most effective way to audit and the specific
areas on which the audit team should focus. To aid in the
development and resolution of DPD cases, the following
requirements will be put in place for returns with the DPD:

1. The team manager assigned to the case will contact the DPD
technical advisers to share and discuss the audit plan.

2. Contact will be maintained with the DPD technical advisers
throughout the audit process to discuss issues and involve them
as needed.

3. Form 5701, Notice of Proposed Adjustment,
Form 886A, Explanation of Items, and/or Form 906, Closing
Agreement, will be provided to the DPD technical advisers for
review and concurrence. The technical adviser team has indicated
that it will put in place a 10-workday turnaround on the review
of these forms.

4. For fast track, pre-appeals
conferences, and pre-filing agreement cases, the team manager
will contact the DPD technical advisers to involve them in the
process, including conference attendance and concurrence with
any agreement.

The Service recognizes that the law
related to the DPD is complex, with many nuances, and DPD
technical advisers are ready to assist audit teams by both
examining the DPD and providing answers to specific questions
that might arise.

Implications

The IDD
emphasizes the internal IRS coordination that is now required
around the DPD as a result of its designation as a Tier I issue.
However, the IDD is unique in that it is the first directive on
a Tier I or Tier II issue that contains redactions. For example,
the criteria for subjecting a taxpayer’s DPD to mandatory audit
are specifically removed from the IDD. The reason for such
redactions remains unclear.

Editor Notes:

David J. Kautter, CPA Ernst & Young LLP Washington, DC

Unless otherwise noted, contributors are members of or
associated with Ernst & Young LLP.

If you would like
additional information about these items, contact Mr. Kautter at
(202) 327-8878 or david.kautter@ey.com.

The winner of The Tax Adviser’s 2014 Best Article Award is James M. Greenwell, CPA, MST, a senior tax specialist–partnerships with Phillips 66 in Bartlesville, Okla., for his article, “Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704(c) Allocations.”

Magazine

Don’t get lost in the fog of legislative changes, developing tax issues, and newly evolving tax planning strategies. Tax Section membership will help you stay up to date and make your practice more efficient.